Guy Carp’s Vice Chairman Explains Multiple Tasks of a Modern Reinsurance Broker

Following a presentation from Guy Carpenter, moderated by the CEO Alex Moczarski, we caught up with the company’s Vice Chairman David Priebe, who explained just what’s involved in operating one of the world’s largest reinsurance brokers in this new era.

He has a lot on his plate. “I have three core areas of responsibility,” he said. “I oversee what we call our global partner segment which are large insurance companies operating on a global scale and multiple lines of business. I’m also responsible for our capital markets in the investment banking group, and I run our strategic advisory practice.”

One of the main points Priebe stressed in the presentation was the quality of the people that are now involved in the programs that he oversees. “I’m blessed to have a full host of very talented, capable colleagues doing all the heavy lifting,” he continued. “As Alex mentioned, we recognize that we need to be able to provide a whole range of knowledge, and insights, and capabilities to our clients.

“Historically, we’ve been a firm that’s just executed risk transfer solutions, so we had to be very good at understanding each line of business, understanding risk, understanding how to negotiate the perceptions of that risk with a counterparty to get the best coverage and best price for our clients.”

Priebe pointed out, however, that increasingly, “we’ve found that that remains our core segment, but we needed to have continually enhanced analytics to evaluate risk exposure, and then evaluate that exposure against the company’s capital structure. So we needed to bring in lots of actuary talent, lots of cap modeling talent, and corporate finance talent to understand the whole interaction of: How does reinsurance fit into the overall capital structure and what’s the most efficient form?

“Secondly, we really found that it was very valuable for our franchise if we could sit down and work with the clients in developing growth strategies. Growth strategies range from a whole cadre of ways to go about it, from identifying geographies that a company wants to get into.”

As examples he said: “If they want to get into Latin America, Brazil, Columbia, Chile, knowing those countries and the risk aspects of those countries, to help them identify what lines of business, how to get in, what are the distribution channels that they should get involved in?”

As a result Guy Carpenter “needed to build resources of people that really understood those geographies and the front end access of the business, as well as then helping our clients in terms of risk selection,” Priebe explained. “A lot of work’s been going into front end risk tools, so utilizing predictive analytics, big data, how to leverage big data to enhance risk selection and risk pricing.

“We at Guy Carpenter have been finding either best in class partners who are good at that, and/or building some of those tools ourselves and bringing that to our clients, and then M&A, so identifying who might be somebody to buy and what assets you may have that are no longer strategic that should be sold.”

He commented on Moczarski’s description of the “face of Guy Carpenter,” which numbers around 2400, noting that that it “has changed quite significantly over the past five years,” which he explained largely corresponds to the exponential growth of technology.

“Technology is now playing a huge role, just the speed of information and the ability to assimilate knowledge,” he said. “In the old days, knowledge was power, and so therefore we had a lot of power and knowledge because we had the information and no one else did. That was a beneficial factor.

“Now, information is very easy to come by, so the critical piece is having individuals that can assess that information, identify trends, and then help clients then determine how to use that information to benefit their business. It’s become more of a, ‘Let me show you what I know.’ It’s more “let me help you understand the issues going on around you and how you can apply that to your risk making decisions and business strategies.”

One of the main difficulties with collecting all that data is figuring out what’s useful, and what’s not. Priebe said that in “any given situation, and particularly when you get to a risk selection, big data. What is important? What are the signals? What are the true signals that identify propensity to loss, or not, and being able to sort through that? Because otherwise you can just be overwhelming yourself with too much data and not focusing on what really matters.

“One of the things that we’re trying to do is help companies identify what are the important signals in a risk characteristic that they should be focusing in on for their risk selection, decision making, and pricing.”

Guy Carpenter deals mainly with primary insurance companies. Its business is to assist “primary insurance companies that provide insurance products to consumers and corporations,” Priebe said. “Naturally, that can extend more broadly, as we are increasingly working with large corporates to help them in managing their complex risk through their captives in other areas, and often, particularly, when it comes to a large business, like Worker’s Compensation, giving them tools that help them manage Worker’s Compensation claims and other things to support in those areas.”

Because very large companies have a lot of different activities, and a lot of different risks, they’re going to have a primary carrier. But the primary carrier may not be able to analyze all of those risks. In that case a reinsurance broker – Guy Carpenter in this case – tries to provide its services early on. “We try to get in at the beginning and if not us, through our sister company, Marsh,” Priebe said.

Much of the discussion with David Priebe centered round the changes that have been going on in the re/insurance industry, and how a company like Guy Carpenter recognizes those changes and adopts plans to deal with them. In a discussion as to whether or not the annual renewal cycle, which is almost as old as the industry itself, may be outmoded, he described it as “one of the new evolutions that’s taken place.

“Clients want consistency of pricing, and certainty of capital, a commitment, and a multiyear structure supports that, provided the credit position of that counterparty remains consistent during the life of that contract,” he continued.

“Increasingly, we’ve been employing, and the market is now embracing, a willingness to offer multiyear products, generally, two to three years. It’s difficult to go beyond three years, not because you couldn’t do it, but because, as much as everyone thinks, ‘My exposure is consistent or my situation is the same,’ I haven’t seen a situation that, within a three year time horizon, there isn’t a material change in exposure that would require almost a total cancel and rewrite of the program.”

In conclusion he said: “I think we are moving to the day where we will have a blend of multiyear polices on reinsurance contracts, and those will be geared to the quality of the counterparties and the consistency of the portfolio.”

As far as capital market transactions are concerned they are multiyear. “The problem,” Priebe said, with that “is it’s a single limit over a period of time. If that limit’s exhausted, the company has to come back to market to replenish that capital. Whereas, in a rated carrier structure, we’ve been negotiating multiple limits each and every year so that even if there’s significant loss activity year one, there’s capital and limits still to be provided in years two and three. The market is now willing to offer that.

“In the past they wanted to always re-price their product plus loss and now they’re realizing that if they want to maintain their core clients they’d better provide them more longer term duration policies.”

Priebe described the overall industry trend, as companies recognizing the “need to be responsive to their clients. Most reinsurers would prefer to continue to only offer annualized products, annualized products with a long-term commitment from their client that they’ll always buy from them the next years.”

Another subject, or trend, is the increasing recognition by the re/insurance industry of the huge uninsured nature of economic losses, mainly in emerging markets, but also sometimes in developed markets. Essentially the question is how do you go about convincing individuals, companies, and eventually governments that insurance is probably one of the best solutions?

“It’s the holy grail,” Priebe said, referring to efforts to align public policy with the insurance industry’s expertise. “Ultimately if you look at the risk that’s being borne, and you take the United States, you look at FEMA and the amount of post-lost financing that goes on, which ultimately is being paid for by the taxpayers through increasing our debt.”

He explained that Guy Carpenter has been “working with public policy makers to help them understand what is the risk that’s truly there, and give them a sense of what’s the probability of that loss happening and try to give them a fair, realistic assessment of what’s the loss cost of that risk, because ultimately society is going to have to pay for that.

“Then trying to get them to see what is the most efficient way to finance that loss. Is it in the state of Florida? Have only the citizens of Florida financed a major hurricane event through future rate assessments or is it better to spread that burden across a broader populous, the entire United States, or even better the global economy?

“That’s the work that we’re trying to do in terms of working with state legislators, working with the federal government, working with entities like the World Bank, showing that risk transfer into the capital markets is a better solution than post-loss financing through increased deficits and taxes, because that creates a long term burden on the economy and on future generations.”

He recognizes, however, the major challenge to that solution; explaining that we “live in a very short term environment and everyone wants something for free today under the belief that it will never happen. If you look at the current physical situation, if our government started managing the country as a business they would recognize that, ‘I can’t keep taking on this liability. I need to start transferring it.’

“The good news is we’ve now created a global capital market that understands this risk, and is willing to price this risk on a very efficient basis; it now makes more sense to transfer it rather than do post-loss financing. We’ll see what happens with flood in the US, if the NFIP goes out and starts transferring risk into the private market, which they’re legislated, they now have the ability to do that. It doesn’t mean they will, and if it’s not a fair price they won’t do it.”

The foremost example of the kind of risk transfer that works is the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which although quite small, uses probabilistic dimensions to determine loss amounts, and pays governments accordingly in a relatively short time after an event.

“It’s a great solution,” Priebe said, “because each of those islands unto themselves couldn’t manage their own risk alone. By pooling that Caribbean risk in one facility it allows them to harness risk capital at a lower cost for the benefit of that entire area.

“Some of the initiatives going on in the World Bank, which wants to be a facilitator of this process, might create risk financing mechanisms for many emerging countries that aren’t able to do this themselves, and start at least insuring the public infrastructure. There are significant amounts of infrastructure risk owned by public entities that is not insured. It would serve the global economy well if they did insure it.”

In conclusion he said it’s “silly that they don’t; unfortunately it means that there is immediate cost and people often don’t like to do balanced budgets.” This is a familiar problem, as politicians all too frequently pass legislation, the consequences of which they won’t have to face once they’re out of office.